CHAPTER 3. JOB CREATION IN THE WIND, MINI-

HYDROELECTRIC AND PHOTOVOLTAIC INDUSTRY_________ 21 II.. Measuring job creation in Spain’s wind, mini-hydroelectric and photovoltaic industries. _______________________________ 21 IIII.. Estimate of the number of jobs created in wind power ______ 22

-i- Study of the effects on employment of public aid to renewable energy sources

Europe’s current policy and strategy for supporting the so-called “green jobs” orrenewable energy dates back to 1997, and has become one of the principaljustifications for U.S. “green jobs” proposals. Yet an examination of Europe’sexperience reveals these policies to be terribly economically counterproductive.

This study is important for several reasons. First is that the Spanish experience isconsidered a leading example to be followed by many policy advocates and politicians.This study marks the very first time a critical analysis of the actual performance andimpact has been made. Most important, it demonstrates that the Spanish/EU-style“green jobs” agenda now being promoted in the U.S. in fact destroys jobs, detailing thisin terms of jobs destroyed per job created and the net destruction per installed MW.

The study’s results demonstrate how such “green jobs” policy clearly hinders Spain’sway out of the current economic crisis, even while U.S. politicians insist that rushinginto such a scheme will ease their own emergence from the turmoil.

The following are key points from the study:

1. As President Obama correctly remarked, Spain provides a reference for the

establishment of government aid to renewable energy. No other country has given such broad support to the construction and production of electricity through renewable sources. The arguments for Spain’s and Europe’s “green jobs” schemes are the same arguments now made in the U.S., principally that massive public support would produce large numbers of green jobs. The question that this paper answers is “at what price?”

that for every renewable energy job that the State manages to finance, Spain’s experience cited by President Obama as a model reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created.

1 The MITRE project was partially funded by DG TREN (Energy & Transport) of the EuropeanCommission under the Altener programme. -1-Study about the effects on employment of public aid to renewableenergy sources

3. Therefore, while it is not possible to directly translate Spain’s experience with

exactitude to claim that the U.S. would lose at least 6.6 million to 11 million jobs, as a direct consequence were it to actually create 3 to 5 million “green jobs” as promised (in addition to the jobs lost due to the opportunity cost of private capital employed in renewable energy), the study clearly reveals the tendency that the U.S. should expect such an outcome.

4. At minimum, therefore, the study’s evaluation of the Spanish model cited as

one for the U.S. to replicate in quick pursuit of “green jobs” serves a note of caution, that the reality is far from what has typically been presented, and that such schemes also offer considerable employment consequences and implications for emerging from the economic crisis.

appears that Spain likely has created a surprisingly low number of jobs, two- thirds of which came in construction, fabrication and installation, one quarter in administrative positions, marketing and projects engineering, and just one out of ten jobs has been created at the more permanent level of actual operation and maintenance of the renewable sources of electricity.

6. This came at great financial cost as well as cost in terms of jobs destroyed elsewhere in the economy.

7. The study calculates that since 2000 Spain spent €571,138 to create each “green job”, including subsidies of more than €1 million per wind industry job.

8. The study calculates that the programs creating those jobs also resulted in the destruction of nearly 110,000 jobs elsewhere in the economy, or 2.2 jobs destroyed for every “green job” created.

9. Principally, these jobs were lost in metallurgy, non-metallic mining and food processing, beverage and tobacco.

10. Each “green” megawatt installed destroys 5.28 jobs on average elsewhere in the economy: 8.99 by photovoltaics, 4.27 by wind energy, 5.05 by mini-hydro.

11. These costs do not appear to be unique to Spain’s approach but instead are largely inherent in schemes to promote renewable energy sources.

12. The total over-cost – the amount paid over the cost that would result from buying the electricity generated by the renewable power plants at the market price - that has been incurred from 2000 to 2008 (adjusting by 4% and calculating its net present value [NPV] in 2008), amounts to 7,918.54 million Euros (appx. $10 billion USD)

13. The total subsidy spent and committed (NPV adjusted by 4%) to these three renewable sources amounts to 28,671 million euros ($36 billion USD).

14. The price of a comprehensive energy rate (paid by the end consumer) in Spain would have to be increased 31% to being to repay the historic debt generated

-2- Executive Summary: Lessons from the Spanish renewables bubble

by this rate deficit mainly produced by the subsidies to renewables, according

to Spain’s energy regulator.

15. Spanish citizens must therefore cope with either an increase of electricity rates or increased taxes (and public deficit), as will the U.S. if it follows Spain’s model.

16. The high cost of electricity due to the green job policy tends to drive the relatively most energy-intensive companies and industries away, seeking areas where costs are lower. The example of Acerinox is just such a case.

17. The study offers a caution against a certain form of green energy mandate. Minimum guaranteed prices generate surpluses that are difficult to manage. In Spain’s case, the minimum electricity prices for renewable-generated electricity, far above market prices, wasted a vast amount of capital that could have been otherwise economically allocated in other sectors. Arbitrary, state-established price systems inherent in “green energy” schemes leave the subsidized renewable industry hanging by a very weak thread and, it appears, doomed to dramatic adjustments that will include massive unemployment, loss of capital, dismantlement of productive facilities and perpetuation of inefficient ones.

18. These schemes create serious “bubble” potential, as Spain is now discovering. The most paradigmatic bubble case can be found in the photovoltaic industry. Even with subsidy schemes leaving the mean sale price of electricity generated from solar photovoltaic power 7 times higher than the mean price of the pool, solar failed even to reach 1% of Spain’s total electricity production in 2008.

19. The energy future has been jeopardized by the current state of wind or photovoltaic technology (more expensive and less efficient than conventional energy sources). These policies will leave Spain saddled with and further artificially perpetuating obsolete fixed assets, far less productive than cutting- edge technologies, the soaring rates for which soon-to-be obsolete assets the government has committed to maintain at high levels during their lifetime.

20. The regulator should consider whether citizens and companies need expensive and inefficient energy – a factor of production usable in virtually every human project- or affordable energy to help overcome the economic crisis instead.

21. The Spanish system also jeopardizes conventional electricity facilities, which are the first to deal with the electricity tariff deficit that the State owes them.

22. Renewable technologies remained the beneficiaries of new credit while others began to struggle, though this was solely due to subsidies, mandates and related programs. As soon as subsequent programmatic changes take effect which became necessary due to “unsustainable” solar growth its credit will also cease.

23. This proves that the only way for the “renewables” sector - which was never feasible by itself on the basis of consumer demand - to be “countercyclical” in crisis periods is also via government subsidies. These schemes create a bubble, which is boosted as soon as investors find in “renewables” one of the few profitable sectors while when fleeing other investments. Yet it is axiomatic, as -3-Study about the effects on employment of public aid to renewableenergy sources

we are seeing now, that when crisis arises, the Government cannot afford this growing subsidy cost either, and finally must penalize the artificial renewable industries which then face collapse.

24. Renewables consume enormous taxpayer resources. In Spain, the average

annuity payable to renewables is equivalent to 4.35% of all VAT collected, 3.45% of the household income tax, or 5.6% of the corporate income tax for 2007.

-4-CHAPTER 1. THE ORIGIN OF GOVERNMENT SUPPORT TO RENEWABLE ENERGY

SOURCES AND THE PHILOSOPHY OF

GREEN JOB CREATION

II.. The green job philosophy

On January 16th, 2009, president-elect Barack Obama visited an Ohio business thatmanufactures components for wind power generators. Under the watchful eyes ofboth factory workers and the press, Obama assured, amid deepening unemploymentand the onset of one of the gravest economic crises in recent history, that renewableenergy “can create millions of additional jobs and entire new industries.”2

The president then defended his energy subsidy package by citing examples from othercountries: “And think of what’s happening in countries like Spain, Germany and Japan,where they’re making real investments in renewable energy. They’re surging ahead ofus, poised to take the lead in these new industries.”

But the benefits, according to Barack Obama, will only be achieved “if we act rightnow.” The president expressed awareness that certain indicators suggest that “half ofthe wind projects planned for 2009 could wind up being abandoned because of theeconomic downturn”. If that were to happen, he said, “think about all the businessesthat wouldn’t come to be, all the jobs that wouldn’t be created, all the clean energy wewouldn’t produce.”

The president is surely motivated by concern over the social pariah of unemployment,and every president seeking to work on behalf of his country must make often difficultdecisions driven by a desire for the economy to generate employment. Furthermore,Obama correctly states the problem in counterfactual3 terms. Of importance, as theFrench economist Frédéric Bastiat said, is not just what is seen but also what is unseen.

2 Speech by president Obama at a wind turbine plant in Bedford Heights, Ohio:http://www.cbsnews.com/blogs/2009/01/16/politics/politicalhotsheet/entry4727659.shtml.3 Counterfactual analysis in economic science refers to the study of comparative courses of observableaction (after their occurrence) against alternate courses of action that are not seen because the choiceof action prevents their taking place. For more on counterfactual analysis in economic science, seeHülsmann’s, "Facts and Counterfactuals in Economic Law", JLS Vol. 17, no. 1, pp. 57-102. -1-Study about the effects on employment of public aid to renewableenergy sources

When we spend money to build a fast food restaurant instead of solar panels, the costof this course of action is all of the panels that were never built and all of the jobs inthat industry that were never created. Similarly, if the government decides to spendtaxpayer money on windmills or solar panels, their unseen cost would be all thehamburgers not cooked or any other productive activity that would no longer takeplace as a result of the state directing resources to windmills or solar panels.Policymakers must recognize that because of government action, other jobs are notcreated.

Of course other studies including by U.S. academics have also noted several relatedimpacts, for example: • Raising energy costs kills. According to a Johns Hopkins study, replacing three- fourths of U.S. coal-based energy with higher priced energy would lead to 150,000 extra premature deaths annually in the U.S. alone (Harvey Brenner , “Health Benefits of Low Cost Energy: An Econometric Case Study,” Environmental Manager, November 2005). • Reducing emissions, a major rationale for “green jobs” or renewables regimes, hits the poorest hardest. According to the recent report by the Congressional Budget Office, a cap-and-trade system aimed at reducing greenhouse gas emissions by just 15% will cost the poorest quintile 3% of their annual household income, while benefiting the richest quintile (“Trade-Offs in Allocating Allowances for CO2 Emissions”, U.S. Congressional Budget Office, Economic and Budget Issue Brief, April 25, 2007). • Raising energy costs loses jobs. According to a Penn State University study, replacing two-thirds of U.S. coal-based energy with higher-priced energy such as renewables, if possible, would cost almost 3 million jobs, and perhaps more than 4 million (Rose, A.Z., and Wei, D., “The Economic Impact of Coal Utilization and Displacement in the Continental United States, 2015,” Pennsylvania State University, July 2006)

The latter point is the principal focus of this study, an analysis that quantifies actual netjob creation in renewable energy resulting from government aid, to the detriment ofalternate uses.4 In other words, we attempt to identify how many unseen jobs are lostfor each one created – those that are seen - thanks to government aid to green energy.

IIII.. The European tradition of government aid to

create “green jobs”

Europe’s current policy and strategy for the support of so-called renewable energydates to 1997. On November 26th of that year, the European Commission presented

4 We also note the publication, as this report was being finalized, of an assessment questioning theassumptions, findings and methodologies of the prevalent projections of “green jobs” schemes. Morriss,Andrew P., Bogart, William T., Dorchak, Andrew and Meiners, Roger E.,Green Jobs Myths (March 12,2009). U Illinois Law & Economics Research Paper No. LE09-001. -2- The origin of Government support to renewable energy sources and the philosophy of green job creation

the White Paper “for a Community Strategy and Action Plan” titled “Energy for thefuture: renewable sources of energy5.” In presenting this European aid scheme barelyfive days before the Kyoto conference (Third Conference of the Parties to the UnitedNations Framework Convention on Climate Change), where the signing of a CO2 rationingaccord had already been foreseen, the European Union wanted to get ahead of eventsand opt for a transformation of its energy model in order to reach the then-stated goalof reducing its greenhouse gas emissions by 2010 to 15% below1990 levels6.

The White Paper’s starting point is that renewable energy sources “are currentlyunevenly and insufficiently exploited in the European Union.”7 At the time, those formsof energy production comprised less than 6% of the entire consumption of energy. Thedocument established the ambitious goal of transforming the state of affairs through anartificial stimulus such that by 2010 the EU would have doubled the contribution ofrenewables to achieve nearly 12% of the union’s energy consumption. If we realize thatin 1997 the funding to renewables to achieve 6% of its energy production alreadyincluded large hydroelectric producers, and that hydro energy had little room to growdue to environmental issues, we quickly understand just how ambitious this project is.

That is to say that, taking into account certain, often material geographic and economicdistinctions, Europe had already implemented, at some cost, a “green jobs” agenda likethat now proposed in the U.S., and sought to increase it further.

The familiar argument in favor of political action to support the massive developmentof renewable energy, as now popularized by president Barack Obama, had alreadybeen made: “Development of renewable energy sources can actively contribute to jobcreation, predominantly among the small and medium sized enterprises which are so centralto the Community economic fabric, and indeed themselves form the majority in the variousrenewable energy sectors. Deployment of renewables can be a key feature in regionaldevelopment with the aim of achieving greater social and economic cohesion within theCommunity.”8

Thus, in 1997 the creation of jobs in the “renewables” industry emerged as one of themain justifications and focal points of the plan. The authors of the report estimatedthat between 500,000-900,000 new jobs would be created. The White Paper statesthat “while it is not possible to reach any hard conclusions as is the likely cumulative level ofjob creation which would derive from investments in the various forms of renewable energysources, it is quite clear that a pro-active move towards such energy sources will lead tosignificant new employment opportunities.”9 What the White Paper does not clarify is therelationship between the new job opportunities that “would derive from investments inthe various forms of renewable energy sources” and those that would not be created orthat would be destroyed in other parts of the economy precisely because the fundingdiverted to renewable energy.

IIIIII.. Europe moves to create new employment

opportunities

On September 27th, 2001, under the policies and recommendation of the White Paper,the European Union approved Directive 2001/77/CE of the European Parliament andof the Council on the promotion of electricity produced from renewable energysources in the internal electricity market10.

Already aware of the requirements of the Kyoto Protocol, the European Unionlaunched the development of renewable energy by aiming for “the global indicativetarget of 12% of gross domestic energy consumption by 2010” through the use ofrenewable sources of energy, as part of which an objective for the electricity sector isadded later on that year, a “22.1% indicative share of electricity produced fromrenewable energy sources.”11 Already at its inception, the directive states that, beyondits environmental objective, the proposal “can also create local employment.”

That same year the Monitoring and Modeling Initiative on Targets for Renewable Energy(MITRE) project was set out by the European Commission “to confirm the view thatthe European Union renewable energy targets [were] achievable, and to inform keypolicy and decision makers of the economic (employment) benefits of a proactiverenewable strategy in order to meet the targets.”12 The project ran for two years andits main conclusion was a projected net employment growth in the European Union of950,000 jobs under current policies, and up to 1,660,000 under the AdvancedRenewable Strategy (ARS) of meeting 22.1% share of electricity produced fromrenewable energy sources by 2010. The authors of this study led by Energy forSustainable Development (ESD) Ltd., a global market leader in the provision of lowcarbon energy and sustainable development solutions, concluded that “a more pro-active encouragement of renewable gives rise to significant employment gains.”13

On January 10th, 2007, the Commission presented an energy and climate policypackage the expected repercussions of which were far from modest. According to theCommission itself using language of the sort now employed in the U.S., the packagewould “set the pace for a new global industrial revolution.” At the European summit inMarch, 2007, an agreement was adopted mandating certain EU-wide binding targetsthat the Commission would attempt to implement, to achieve 20% of total energyconsumption in the European Union by 2020. In November of the same year theCommission released its “Strategic Energy Technology Plan” and in January of 2008 theCommission proposed a directive that included objectives for each country, so thatthe common goal of the plan could be reached.14 During the March 2008 European

Union summit, an agreement was reached to adopt an energy and climate measurepackage by the end 2008 which would replace the measures from the 2001 directive.In September the package passed the Industry Committee of the European Parliamentwith almost unanimous support, and on December 17th this new directive wasapproved, substituting for the measures and objectives from the 2001 directive.

According to the new directive, each member state must implement its own share ofrenewable energy so that the European Union can achieve, by 2020, the goal of goingfrom a total of 8.5% (in 2005) renewable energy to 20%. Each country of the Unionthereby promised to increase its share of renewable energy production by at least5.5% from 2005 levels, calculating the rest of the increase based on gross domesticproduct. Spain’s objective requires moving from an 8.7% renewable energy level in2005 to 20% by 2020.

The directive’s explanatory memorandum highlights the argued benefits of the jobcreation in knowledge-based industries. The document reiterates the thesis that the“promotion of investments in energy efficiency, renewable energy and newtechnologies contributes to Europe’s strategy for knowledge and employment.”

The creation of green jobs would this time become the proposal’s principal rationale.On January 23rd 2008, the very same day that the Commission proposed the packagein the new directive, Commission President José Manuel Barroso said that theproposal would be “an opportunity that should create thousands of new businessesand millions of jobs in Europe. We must grasp that opportunity.” The same idea wasrepeated, albeit with different tones, by various political leaders, giving fodder to apress release by the Commission that captured comments by its members under thetitle, “Boosting jobs and growth by meeting our climate change commitments.”15

Not everyone, however, succumbed to the Commission’s euphoria for the directive’sjob–creation potential. The same day, the European Trade Union Confederation(ETUC) sent out a release recognizing the important step taken by the Commissionbut warned of the necessity to guarantee European jobs in a globalized world. That isto say that the union syndicate saw the potential risk of employment destruction dueto the package’s “green energy” requirements and other measures, and thus clamoredfor the passing of a “compensation mechanism” to guarantee employment toEuropeans in the heavy industry sector.

The release recommended that the “Globalisation Adjustment Fund be enlarged so as

to limit the negative consequences for workers of measures to combat climatechange.”16 The jobs negatively affected would not be new green jobs, of course, but theless visible ones that would be destroyed due to mandates, loss of competitiveness,and reallocation of resources. The ETUC could have gone further still if only it had,like Obama, considered in its statement those positions that simply would cease to becreated in other industries.

15 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/80&format=HTML&aged=0&language=EN&guiLanguage=en.16 http://www.etuc.org/a/4505. -5-Study about the effects on employment of public aid to renewableenergy sources

This same confederacy of European unions again declared its bittersweet impressionover “the objectives of reducing greenhouse gas emissions by 20% and increasing theshare of renewable energy to 20%” after the December 12 confirmation by theEuropean Council. ETUC welcomed the agreement while also “regretting the lack ofaccompaniment measures for workers affected by the consequences.” Furthermore,the organization doubts, given the current circumstances, the “EU’s financial capacityto invest sufficiently in the 27 countries to reduce CO2 emissions and promoterenewable energy sources.”17

IIV V.. Background to Case Study: Policies in Spain

As Obama correctly remarked (and we will study in the next section), Spain provides areference for the establishment of government aid to renewable energy. Indeed, thespecial regime,18 under which renewable energy is juridically differentiated, has beenregulated in Spain since 1980 when Law 80/1980 on Energy Conservation was enacted.

Royal Decree 2366/1994 was published in December of 1994. It dealt with electricalproduction by hydroelectric installations and with cogeneration and other installationsthat make use of sources of renewable energy; this decree constitutes an initial feed-intariff scheme (which has the effect of artificially increasing the price paid for electricityproduced by renewables) for production with renewable sources. Over the years,Royal Decrees19 and laws would continue to emerge, and with them, governmentsupport to these kinds of energy production.

Royal Decree 436/200420 was approved in March of 2004, establishing the

methodology for updating and systematizing the legislative and economic system ofelectric energy production under the special regime. The rule renewed andstrengthened public assistance to renewable energy with above-market premiums ofup to 575% for solar photovoltaic plants and up to 90% for wind-based electricinstallations. During the 2004 general election campaign the socialist candidate, JoséLuis Rodríguez Zapatero, promised “a reorientation of the energy model (…) towardsone that is more centralized, more diversified and safe, less wasteful and also moresolidary” (meaning it requires payment by many into a system “for the common good”from which they achieve little benefit). It was a change in energy policy that would takeplace—and this is paramount—“built on all renewables, and in particular, solarenergy.”21 As we shall see in the next sections, the government’s zeal to impelrenewable energy led to strong growth in the industry and in related employment.

17 http://www.etuc.org/a/5667.18 “The generation activity in Special Regime includes the electric energy generation from power plantsup to 50 MW which make use of renewable energies or wastes as primary energy, and those such ascogeneration that involve the utilization of high efficiency and energy saving technologies”. Ministerio deIndustria, Turismo y Comercio, at http://www.mityc.es/energia/electricidad/RegimenEspecial/Paginas/Index.aspx.19 Executive order formally sanctioned by the King (typical in monarchical countries, such as Spain).20 http://www.cne.es/cne/doc/legislacion/(36)RD436_2004.pdf.21 See http://www.energias-renovables.com/paginas/Contenidosecciones.asp?ID=14&Cod=4335&Tipo=historico&Nombre=Noticias. -6- The origin of Government support to renewable energy sources and the philosophy of green job creation

The Royal Decree currently in place is 661/200722, which establishes the methodologyfor updating and systematizing the legislative and economic regime of electric energyproduction under the special regime. The new method continues to heavily supportrenewable energy. Wind energy producers, for example, received €73.22/MWh (appx.$92 USD per MWh), which could be anywhere between 136% and 209% of the marketprice at the time. This is relevant because it does appear that such price-hiking subsidyis necessary to make renewable technologies in a sense viable.

Soon after approving this new Royal Decree, Prime Minister Zapatero defended thechange from the existing energy model to his energy model “of the future”—whichSpain would lead, using language similar to that now employed in the U.S. — andcorrelated his efforts in the promotion of renewables with the creation of a highvolume of jobs in the renewable energy sector. History would partially prove himright. The question we address is “at what price?”

22 With the exception of the remuneration as well as part of the administrative procedures in force forsolar photovoltaic plants for installations subsequent to the deadline for the retribution according to theRoyal Decree 661/2007, which is currently regulated in those regards by the Royal Decree 1578/2008.http://www.cne.es/cne/doc/legislacion/RD_661-2007-RE.pdf. -7-CHAPTER 2. THE SPANISH RENEWABLES BUBBLE

II.. Introduction. Wind and photovoltaic energy

This section will study two paradigmatic cases in Spain: wind energy and photovoltaicsolar energy.23

The boom in renewable energy is the result of the confluence of two factors that havereinforced each other in recent years.

I.1. Support to renewable energy

In order to enhance renewable energy sources in Spain, the Government promotedlegislation the main goal of which is to reach 12% penetration by these sources in theSpanish energy market and 20% of electric production in 2010. There are primarilytwo mechanisms: • Setting regulated rates or highly subsided premiums as compared with a mean reference rate, with the clear objective of attracting investment to the relevant sector. In addition, electricity retailers are forced to buy all the electricity generated by renewable sources, which eventually implies that, unlike other forms of production, the sale of renewables’ output is guaranteed and hence so is the return on the investment. • Incentives: ICO (Instituto de Crédito Oficial) credits and IDAE (Instituto para la Diversificación y Ahorro de la Energía) aid, to which subsidies from the Spanish regions (Comunidades Autónomas) are added.

I.2. Economic cycle

The second case is the economic cycle itself, which has clearly propelled theestablishment of these technologies in Spain. We shall analyze how interest rates (fromthe European Central Bank) and the ease with which credit is granted affects Spainalong the cycle, as well as the volume of credit that the electric industry receives,particularly through September of 2008, when the photovoltaic industry burst itsbubble.

23 The thermoelectric solar energy is residual in Spain. The only plant (11 MW) was installed in 2008. -8- The Spanish renewables bubble

IIII.. The retributive framework for wind energy

To achieve the goal of having 12% of primary energy originated from renewableenergy, the Renewable Energy Plan (PER) 2005-2010 establishes that in 2010,20,155MW of wind power (capacity) must be installed.

Source: CNE24, own elaboration.

The rate of development of this technology has remained comparatively quite calm(considerably more so than photovoltaic energy, which we shall mention later on). Toattract investors and make it profitable against other forms of energy, it must remainsubsidized. However, it has not experienced a bubble as intense as the oneexperienced by the photovoltaic industry, its annual rate of capacity increase beingmore in tune with PER’s own forecasts for 2005-2010.

Spain has become the world’s third-largest country for installed wind energy capacity.

24 “Monthly Report on Energy Purchases from Special Regime”. Fromhttp://www.cne.es/cne/Publicaciones?id_nodo=143&accion=1&soloUltimo=si&sIdCat=10&keyword=&auditoria=F -9-Study of the effects on employment of public aid to renewableenergy sources

The last eleven years have seen three different economic regimes relevant to wind: RD2818/1998 (1998-2004), RD 436/2004 (2004-2006) and RD 661/2007 (since 2007).

The effect of the retributive framework on the wind farms has been to achievesufficient stability in the development of the technology. By using estimated data oninstalled capacity, CNE projects that by the end of 2008, 77% of the 2010 objectivewas reached, leaving 40 months to reach the final goal of 20155 MW.

Source: CNE, own elaboration.

With regards to the objective that 20% of electric consumption originates fromrenewable sources by 2010, wind power is the source that contributes the mostamong the renewables, with 10.2% of electric consumption provided by wind26 in 2008.

25 This is the amount paid over the cost – because of the feed-in price system – that would result frombuying the electricity generated by the renewable power plants at the market price (also named “poolprice”), i.e., the over-cost is the result of multiplying the production by the difference between theaverage selling price of each technology and the average price of the market. Both the average sellingprice by technology and the average market price are from the cited CNE “Monthly Report on EnergyPurchases from Special Regime.” The average market price comes from the monthly settlement of thespecial regime’s installations that take part in the electricity production market (made by OMEL-REE –Red Eléctrica Española).26 The total for renewable energy is 19% in 2008. -10- The Spanish renewables bubble

The expansion of this technology, however, has not been the result of economicefficiency but instead of the political pressure to develop it on a massive scale.

The success in the deployment of this energy source must be viewed with theperspective that, although twice as much wind has been installed as the second-leadinginstalled “special regime” technology, cogeneration, the latter sells 3.1 GWh perinstalled MW while wind energy sells 1.7 GWh per MW installed. That is, cogenerationproduces nearly twice the actual electricity per megawatt of capacity constructed.

Figure 3.- Official installed capacity (MW) and production (GWh) to

installed MW ratio for technologies under the "special regime" (2008)

16.000 14.836

4,1 4 3,1 2,2 8.000 1,9 6.207 2 2.945 1.948 558 0,7 N IÓ

0 0 AC ER

Cogeneration Solar Wind Mini-hydro Bio-mass

Source: CNE. CNE’s official installed capacity data are shown for 2008, since these are the special regime power plants which have actually sold electricity during the cited year. As for the solar energy, we include the only thermoelectrical installation there is in Spain (an 11 MW plant which starts operating in 2008).

The sold-energy-to-installed-capacity ratio is even lower for solar energy, providing theleast among all those technologies taken into consideration with 0.7 GWh sold perinstalled megawatt. Nonetheless, we can find a partial cause for this phenomenon inthe fact that in 2008 alone 2253 megawatts have been officially installed; thereby, manyof the plants have not been operating for a full year. The same ratio for solar energy in2007 amounts to 0.71 GWh/MW.

Although in relative terms the wind bubble has not been as great as the oneexperienced by solar photovoltaic energy, it is worth noting that the 15617 MWinstalled is such a high amount that, in the middle of the economic crisis, it willnecessarily represent a very significant portion of the electric deficit. 27

Not without reason, RD 436/2004 was considered by the Secretary of Energy

(November 200628) as “unfortunate”. The inclusion of the new Royal Decree of 2007accomplished in part its objective (cut the percentage of over-cost), even though the

27 The so-called rate deficit of the Spanish electric system is the result of fixed rates over electricityconsumption which doesn’t cover the cost of production, transportation and distribution, and rest ofthe costs of the electric system, especially those of the over-cost produced by governmental support ofrenewable energies.28 See http://www.eleconomista.es/empresas-finanzas/noticias/99679/11/06/Industria-fijara-un-tope-maximo-y-minimo-para-primas-de-la-eolica.html. -11-Study of the effects on employment of public aid to renewableenergy sources

average regulated sale price increased to its highest levels. The accumulated rate deficitsince 2000 is over 15,000 million Euros (appx. $18.9 billion USD) and it increased by5,640 million Euros (appx. $7.14 billion USD) in just 2008, according to settlementinformation29 from CNE (see figure 7).

IIIIII.. Retributive framework for photovoltaic solar

energy: an unprecedented bubble, a reversal and the burst

The objectives laid out by PER 2005 for the development of the photovoltaic industrycall for 371 MW of capacity by 2010. Solar photovoltaic energy would begin to bemassively deployed in Spain from 2004 to 2008. Through that time, three economicregimes have come into effect; thanks to the appealing guaranteed retributions, thesepolicies would massively encourage development of the industry, such as PresidentObama now speaks of. In 2008 Spain would become the second-largest country ininstalled capacity of solar energy, behind only Germany.

The three Royal Decrees are 436/2004 (2004-2006), RD 661/2007 (from June 2007 toSeptember 2008) and RD 1578/2008 (starting on September 29th).

deployment of photovoltaic installations with the purpose of achieving the market

penetration agreement with the European Union for the electricity (20%) and broaderenergy (12%) markets, all while giving preference to the smaller investors. To that end,a scheme of progressive regulated rates is established according to the size of theplant: 575% above the mean reference rate (TMR31) during the first 25 years ofoperation for plants up to 100 kW. Higher capacity plants, however, are penalized witha retribution over the TMR of “only” 300% in the first 25 years.

Nonetheless, as is common with such schemes this only emboldens craftiness. Indeed,in order to take advantage of the 575% over TMR, “solar farms” of various MWstarted to proliferate, motivated by businesses which ran these installations underseveral clients’ names, usually assigning to teach one less than the 100kW limit. Thus,these firms could manage a big solar farm (for example, 10MW) connected by a seriesof transformers up to 100kW each.

In short, such artificial subsidy schemes encourage massive inefficiencies, which

increase the “renewable” requirements’ economic cost.

Not surprisingly, the annual growth rate of plants of up to 100 kW reached 122% bothin 2004 and 2005, and 215% in 2006, with photovoltaic capacity going from 9 MW atthe beginning of 2004 to 140 MW at the end of 2006. Regarding plants above 100 kW,these start out at 3 MW at the beginning of 2004 and end up with 5 MW in 2006. It iswithin this context that many a rent-seeker began to reel in such a juicy catch, fromlarge family estates, venture capital and large corporations (Repsol, Iberdrola, Gamesa)to large financial institutions (BBVA, Banco Santander, La Caixa, CAM, Barclays,Deutsche Bank, etc.) willing to loan money to secure state-guaranteed returns.

III.2. The bubble: September 29th, 2007 through September

29th, 2008RD 661/2007 took effect on June 1st 2007. This new directive aimed to createcontinuity and stability in the solar sector, even though the main difference it offeredlies in the attempt to control an unintended consequence already caused by a previousregulation: the exorbitant development of the aforementioned “solar farms” and thedubious shadow of influences that they had cast.

The photovoltaic retributive framework then unlinks from the TMR retribution and,instead, a fixed reference price is set (whose 2007 initial value is published in the RD),and will be updated yearly against the consumer price index (CPI).

To seek greater professionalism in this sector, installations of more than 100 kW

would no longer be intrinsically discouraged. Thus, those plants willing to welcome theregulated rate retributive framework and with capacity up to 100kW, would receive44 c€/kWh for the first 25 years. Plants between 100kW and 10 MW would receive41.75 cents per kilowatt-hour sold. Furthermore, both rates will be updated annuallyaccording to the CPI.

31 That the Government used to set every year. -13-Study of the effects on employment of public aid to renewableenergy sources

In September of 2007, the National Energy Commission32 (CNE) certified that, as of

information available through that August, 85% of the 371 MW goal towards 2010 hadbeen reached. Furthermore, the CNE assured that the full objective could be attainedby October 2007.

The announcement of the completion of 85% of the objective in 2007 immediately

triggered the necessity to craft a new Royal Decree that would regulate rates and setoperating conditions during a prescribed period of time, which was determined to beone year. The transitional period of one year was chosen to allow installations beingbuilt to have enough time to finish construction and come into operation (10 monthson average), thereby taking advantage of the rates and regulations from RD 661/2007.

The draft33 of the Royal Decree dated September 27th, 2007 revised the powerobjective that must be installed by 2010, increasing it to 1200MW. All installationsbeginning during the transitional period, once the new limit of 1200 MW wasexceeded, would receive a non-subsidized retribution until the new RD took force,and with it, new rates.

The CNE would later ask to modify the draft and is finally able to require allinstallations which signed up before September 30th, 2008, to abide by the newretributive framework (decree 661), regardless of whether the goal of 1200 MW wasmet.

A period of uncertainty then arose in anticipation of the new regulation that wouldtake effect one year after the transitional period (September 2008), which investorspresumed would most likely prove to be less beneficial. Investors, thus, weremotivated to rapidly install as much power as possible before September 29th, 2008,fearing that the upcoming regulation would be much worse.

Such is the source of the boom in the installation of new solar photovoltaic plants that,according to official records published by the CNE34, through December of 2008, thescheme yielded over 2934 MW of solar photovoltaic power in place. However,according to CNE’s own estimates35, it could have realistically reached up to 4156MW36, which would mean that an 83.3% of the overall capacity was installed in 2008alone.

32 According to CNE, reliable data of installed capacity in the case of photovoltaic technology is veryinferior to that of the rest of renewable energy sources. Therefore, at n+1 (referring to month n), theofficial records only gather a 70.6% completion of real capacity.33 Industry Secretary Joan Clos. http://www.mityc.es/NR/rdonlyres/CA88E8AD-B9D8-4829-9BA5-BE08D7F858B4/0/Propuesta_RD_fotovoltaica.pdf.34 Solar plants which are already billing to distributing companies.35 CNE takes into account the average delay in receiving the registry data of the installations inoperation within a period. According to CNE, not until 9 months have passed since they start tomeasure the number of plants installed in a month that they have a reliability of a 95.8%.36 Available on the worksheet named “CumplimientoObjetivo” in the “Monthly Report on EnergyPurchases from Special Regime” (Jan 2009 referred to Dec 2008). -14- The Spanish renewables bubble

“2008*” refers to data extrapolated from the total potential amount of power estimated by the CNE in 2008. The “2008” column, however, represents the 2008 official installed capacity that the CNE accounts for at the beginning of 2009 (which is still incomplete). ** The first and only thermal solar plan is in Spain is brought online in 2008, with a capacity of 11 MW of power. The graph only takes into account photovoltaic solar energy and thus those 11 MW are not added to the official 445 MW seen above.

The new retributive framework extends the generosity of the regulated rates forlarger installations: those above 100 kW and under 10 MW will enjoy for 2009 aregulated price of 44.5751 c€/kWh, and 47.0181 c€/kWh for those plants up to 100kW. Moreover, the one-year grace period allows investors to install as much power aspossible before it ends, thereby joining en masse photovoltaic plants in the 100 kW –10 MW range.

The graph above shows the strong yearly growth in power plants above 100 kWcapacity. According to official data, there was growth in solar capacity of 806% in 2007and 903% in 2008. If we extrapolate from CNE’s estimates, growth in 2008 could havereached as high as 1315%.

The attempt to encourage stability and “professionalism” in the industry by ensuring

strong market penetration by specialized participants (especially to exploit highercapacity plants) in the production of photovoltaic energy, however, has not reaped theexpected benefits. Instead, the energy industry witnessed the entrance of builders, realestate companies, hotel groups and even truck manufacturers.

The regulated tariffs are so generous that, by leveraging 70% of the cost, a 100 kWphotovoltaic plant would yield internal rates of return of up to 17% in 2007.37 To put

37 Own estimate based on a turnkey project that had been settled in 2007 (RD 661/2007 retribution).Despite not being included here, we have used the estimation of a turnkey project (offered by SolarFotovoltaicas Consulting corresponding to 2005 investment costs) to compare the approximate yield -15-Study of the effects on employment of public aid to renewableenergy sources

what this figure implies into perspective, let's compare it with a bond. Currently, a 30year Spanish bond is yielding a return rate close to 5% per year. A solar plantinvestment would obtain 1,200 more basis points with a similar risk and guarantee (theone offered by Spanish Sate). Another way to understand the magnitude of this resultis to calculate the earnings an investor initially endowing 100,000 euros would gather,reinvesting principal and interest yearly at the same 17% internal return rate. In 25years, stemming from those 100,000 euros, the investment would become 5,065,782euros.

Even the Photovoltaic Solar Industry Association (ASIF), through its president, JavierAnta, mentioned that, among other factors, “the ease of credit, a photovoltaic rate –the one from RD 661/07–, which was left high,” have contributed such that the growththis produced in Spain’s industry has absolutely exceeded all expectations and is nowthe world’s number one photovoltaic market, even ahead of Germany.”38

The latter factor is an important one for U.S. policymakers to consider as theyexpressly seek to replicate superficial tales of the European – and specifically Spanish –experience with renewable energy policy regimes by seeking to artificially forcemassive growth.

These two economic regimes commented on have guaranteed extremely high

retributions far beyond the average market selling price (pool price). The regulatedprice has ranged between 6.8 and 10.9 times the mean market price from 2004 to2008. As a result, over-cost has skyrocketed during this period because of the installedcapacity boom explained above. It represented an 85.9% in 2008 and a 90.8% in 2007of the retribution obtained by photovoltaic producers. Figure 6.- (a) Average solar price vs. average pool price per kWh. (b) Total retribution and over-cost (mill. €) of solar energy (2004-2008)

(a) 45,136 42,747 43,382 39,909 36,741

5,86 5,438 6,363

3,565 4,007

2004 2005 2006 2007 2008

Average solar price (c€/kWh) Average pool price (c€/kWh)

under three different retribution frameworks. We are not even considering public aids, such as thoseoffered by ICO-IDAE or local/regional institutions, which would have turned the internal returns higher.38 Statements can be found on Energías Renovables' website and other media. See: http://www.energias-renovables.com/paginas/Contenidosecciones.asp?ID=14&Cod=15756&Tipo=&Nombre=Noticias. -16- The Spanish renewables bubble

The spectacular increase in solar plant deployment has accentuated the 2008 ratedeficit. However, it will do so even more intensely in 2009, at which point every plantthat became operational in 2008 will by then have an entire year online, and alsobecause many of them, operating under RD 661, will begin billing in 2009 (around 1222MW, inferring from CNE estimates). For 2008, the mean sale price of electricitygenerated from solar photovoltaic power is 7 times higher than the mean price of thepool.39

Thus, the over-cost of photovoltaic production, which has to be somehow subsidized

affecting the rate deficit, is and will continue to be enormous. The accumulated ratedeficit from 2000 to 2008 is around 15,189 million Euros (based on provisionalsettlements published by CNE). Just in 2008, it has amounted to 5,640 million Euros(over a third of the total deficit). The estimated 500% growth in installed capacity in2008 implies that the rate deficit could increase uncontrollably in coming years.

Figure 7.- 2000-2008 annual rate deficit (in millions of €)

5640

3800

3047

1149 1223

250 80 0 0

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: From 2000 to 2007, based on the document “El déficit de tarifa”40, by “Energía y Sociedad”. Rate deficit from 2008, source CNE: Settlement report for 200841.

39 Electricity "market price" originated in the wholesale market.40 http://www.energiaysociedad.es/documentos/T3_Deficit_de_tarifas.pdf. -17-Study of the effects on employment of public aid to renewableenergy sources

And after all of these economic efforts, solar energy failed even to reach 1% of Spain’stotal electricity production in 2008.

III.3. The looming collapse of the photovoltaic sector

It is in this context that the Royal Decree 1578/2008 of September 26th, 2008 (whoseresults we will not be able to analyze for a few more months) becomes effective andsets forth a very restrictive and arduous regulation on the photovoltaic industry. Firstof all, it will very much favor roof installations (on buildings) to the detriment of thoseon the ground because the recent “speculative” growth of photovoltaic has taken placein the latter form; fears of an increasing rate deficit has reined in a massive deploymentof solar plants by producers foreign to the industry (according to the Ministry ofIndustry).

Secondly, it greatly decreases retributions to new installations, applying a reduction

close to 30%, which especially affects the ground photovoltaic industry (the mostdeveloped so far).

Finally, a quota system is implemented to monitor the expansion of the industry. In

2009, a maximum of 400 MW of capacity will be the total allowed under the newregulated rates. To that amount, another 100 MW are allowed to avoid a suddendeceleration in the industry (plants installed in 2009 beyond the 500 MW limit shall seetheir subsidy reduced). Furthermore, plants within the quota policy will be penalized.

As we can see, the industry faces a substantial chance at failing if we take intoconsideration that, according to data estimated by the CNE, only 3464 MW have beeninstalled in 2008. The Photovoltaic Industry Association (ASIF), in a press release ofFebruary 16th, 2009, estimates that there have been 15,000 job losses in the solarsector just a few months after RD 1578/2008 has taken effect.42

This reflects the boom/bust nature of the renewables industries, or any others whichexist and subsist solely due to subsidies, mandates and similar regimes, which havebeen experienced to great effect and which must not be ignored by any countryclaiming a desire to replicate Europe’s experience.

IIV V.. The expansion of renewable energy and its link to the expansion of credit

The economic cycle has been the second factor helping the explosion of renewableenergy in Spain.

The availability of low interest rates and easy credit that Spain enjoyed from 1998 until2007 allowed credit-dependent industries to develop with great success. Renewable

energy was not an exception and they witnessed an enormous increase in plantdeployment during those years.

However, as the credit bubble ballooned and with it, an economic bonanza, the seedsof reversal and crisis were being planted. Figure 8.- Expansion in credit destined to finance the “production and distribution of electric energy, gas and water” and the rest of productive activity for 2004-2008. 44,9%

Source: Statistical bulletin from the Bank of Spain. “Total créditos y total créditos dudosos a otros sectores residentes para financiar actividades productivas”. Note: As an approach to the credit assigned to renewable energy sources, we use the category measured by the Bank of Spain: “production and distribution of electric energy, water and gas”.

The world begins to finally feel the credit crisis in the last half of 2007. From that pointon, the other heavily leveraged industries collapse: real estate – a sector of notableoverinvestment in Spain43– transportation, machinery, etc. Renewable energies,especially photovoltaics, however, remain one of the preferred outlets for creditconcession during the past year-and-a-half. Thus, in 2007 and 2008, the growth ofcredit destined to the production and distribution of electric energy (and other utilitiesgas and water) skyrockets (see previous graph), while the rest of the productive sectorof the economy diminishes its levels of leveraging in 2007 – more steeply by thesecond half, when signs appear that unequivocally show that the economic crisis hasstarted in Spain – and ceases leveraging completely in 2008.

As we can see, the growth in photovoltaic power between the second half of 2007 andSeptember of 2008 was enormous (up to several thousand MW according to either

43 The residential houses started in Spain from 2004 to 2006 were 2,163,400 (Instituto Nacional deEstadística: “Estadísticas de la construcción”), on average more than 700,000 per year for a 45 millionpopulation. For comparative purposes, in the US, the number of started houses reached up to 1,716millions in 2005 (US Census Bureau: “New residential construction”), which means the peak year of thereal estate boom for 300 million people. In the US, comparing relative population, the equivalent of thisoverexpansion would be new residential houses started per year of 4,800,000. -19-Study of the effects on employment of public aid to renewableenergy sources

estimates or official date from the CNE). This was a result of economic distortionsbrought about by their industry being a creature of government regulation.

Starting in October, between a more damaging retributive framework for

photovoltaics and a banking liquidity crisis, we can foresee the evaporation of credit tothis and other renewable sources as well.

-20-CHAPTER 3. JOB CREATION IN THE WIND, MINI- HYDROELECTRIC AND

PHOTOVOLTAIC INDUSTRY

II.. Measuring job creation in Spain’s wind, mini-

hydroelectric and photovoltaic industries.

Having studied the Spanish policy of public assistance to renewables and thedevelopment of that sector, we now estimate the job creation attributable to theassistance provided said industry. The first problem that we face is that existing studiesrely on sources that cannot be externally analyzed, such as interviews. Furthermore,those studies often include every contract as job creation when many of them, in factthe majority of them given that we are in an artificial bubble, are contracts forinstallation and manufacturing that would only be sustainable if we assume that therecord rates of installing capacity during the last years were maintained. Thus, we willlook at the installed power of the three main renewable electricity sources in Spainand estimate the related job creation according to the report of the Commission’sMonitoring and Modeling Initiative on Targets for Renewable Energy (MITRE) project.

Different criteria may be used to estimate the jobs created towards the installation ofelectric power in each one of the main sources of renewable production. Aftercomparing the results according to the ratios (employment/MW) between projectsproduced to the Administration and commercial offerings by major developers andturnkey builders, the estimates from the IDAE (Instituto para la Diversificación y

44 “Total annual retribution received by producers of the special regime in Spain, by technology” (chart1.1). -21-Study of the effects on employment of public aid to renewableenergy sources

Ahorro de la Energía)45, and the estimates from MITRE, we opt to accept results fromthe latter, a European research group cited earlier.

The data used for MITRE’s report for Spain assume a higher generation of jobs thanrevealed in the analyzed reports (which can be explained in part by the inclusion ofindirect jobs included in the study financed by the European Commission), but lowerthan what are obtained by following the IDAE (which we have discarded for havingoverstated the amount of contracts that were actually formalized in the sector).

IIII.. Estimate of the number of jobs created in

wind power

We follow the data published in MITRE’s report with regard to the total number ofjobs created by wind energy production through 2010, that is, when the objectives ofthe EU’s plan for 2010 should be completed. With its 14,836 MW installed and 28,579GWh produced by the end of 2008 Spain, according to the report published for Spainby the European Commission (EC) titled “Complying with the objectives and puttingrenewables to work. Country Report, Spain,”46 would be “close to” attaining theobjectives for 2020 according to MITRE (current policies scenario). The goals are setat 15,614 installed MW and 37,558 generated GWh, which means, according to itsestimates, the creation of 15,000 direct and indirect jobs. We accept that figure (thatincludes direct and indirect jobs) for the purposes of this study.

IIIIII.. Estimate of the number of jobs created in

mini-hydroelectric energy

According to the above-cited EC-financed report, “Meeting the targets and puttingrenewables to work,”47 Spain should have created 4,700 jobs between 2000 and 2010in the mini-hydroelectric sector. With 1,949 MW installed and 4,203 GWh producedtowards the end of 2008, it would be far from achieving the 2010 objectives underMITRE’s most conservative scenario (current policies scenario), which goals are set at3,011 installed MW and 9,926 generated GWh. For the purposes of this study, we aregoing to assume that the objective had been attained in 2008 and that 4,700 direct andindirect jobs had been created48 in 2000-2008 by mini-hydroelectric energy production.

45 IDAE is a public “Institute for the Diversification and Saving of Energy”, currently dependent on theMinistry of Industry, Tourism and Commerce.46 Monitoring & Modelling Initiative on the Targets for Renewable Energy (MITRE). “Meeting the targetsand putting renewables to work. Country Report: Spain”http://mitre.energyprojects.net/main.asp?Show=F. This project is part of the Alterner Programme(Directorate General for Transport and Energy. European Commission).47 Monitoring & Modelling Initiative on the Targets for Renewable Energy (MITRE). “Meeting the targetsand putting renewables to work”. http://mitre.energyprojects.net/main.asp?Show=F.48 We are being very generous in accepting such high job creation figures in this field since only twothirds of MITRE´s expected power capacity under the most conservative scenario has been reached. -22- Job creation in the wind, mini-hydroelectric and photovoltaic industry

IIV V.. Estimate of the number of jobs created in solar photovoltaic energy

According to the most optimistic scenario (advanced renewable policy scenario) thatMITRE manages for the photovoltaic industry, Spain, with 2,934 installed MW towardsthe end of 2008 and 2,065 produced GWh, would have achieved the 2020 goal of1,818 installed MW but not the goal of 2,289 GWh produced. From the point of viewof job creation, however, we will consider that those objectives had beenaccomplished and the number of jobs indicated in MITRE, 14,500 positions, have beencreated.49

V V.. Wind, mini-hydroelectric and photovoltaic premiums for the generation of electricity.

The current remunerative scheme for the energy produced under special regimeestablishes a premium over the marginal daily market price for each MWh producedby renewable energies, or a flat rate independent of the period of electricitygeneration. We have calculated the amount of the premiums that have beencommitted by the Spanish legislation (the subsidies NPV in 2008 have been calculatedat 4%) with the assumption that since December 31st, 2008, there have not been anyadditional plants constructed and related employment holds steady. 10,951 millionEuros would have been committed on wind energy in 2008, 1,173 in smallhydroelectric and 8,629 million for photovoltaic generation.

Table 2.- Average price paid to the production of wind, photovoltaic

and mini-hydro and over-cost with regard to the same production paid at average pool price in Spain (1998-2008)

Capacity installed (in

49 Again, we are assuming a higher number of created jobs than in purity should be derived from thecomparison between MITRE’s Spanish Country Report and the actual development of the photovoltaicindustry. -23-Study of the effects on employment of public aid to renewableenergy sources

To calculate the cost of investment in each of these sources we have used thestandard cost for each one of these types of turnkey projects in the current marketand applied it to the megawatt capacity installed between 2000 and 2008. Theoretically

-24- Job creation in the wind, mini-hydroelectric and photovoltaic industry

speaking, we are dealing with the replacement value of these projects according to thecurrent state of the art. • Wind projects: 1.1 M€/MW50. • Photovoltaic projects: 5.5 M€/MW51. • Mini-hydroelectric projects: 1.71 M€/MW52 (average)

V VIIII.. Conclusion

In table 3 we summarize the results achieved in terms of employment, subsidies and

investment in the three main renewable industries. Since 2000, the renewable subsidieshave created less than 50,200 jobs.53 This amounts to 0.2% of Spain’s workforce and0.25% of Spain´s employed workforce. We can see that the average subsidy perworker added in these three sources of renewable energies is more than half a millionEuros (€571,138), ranging from €542,825 per worker added in or by the mini-hydrosector and two-thirds of a million Euros per worker added in or by the photovoltaicsector, to well over €1 million per worker added in or by the wind industry.

Table 3.- Subsidy and investment per worker

WIND 6825 8.175 15000 16436.38 1.095758667 14723 0.981533333879

MINI-HYDRO 1475 3225 4700 2551.28 0.542825532 1067.04 0.227029728682

PHOTOVOLTAIC 14500 0 14500 9683.48 0.667826207 16131.5 1.112517241

50 As an example, see: “The wind energy industry in Spain”, by ICE. Economic bulletin, nº 2740, fromSeptember 23rd to September 29th 2002.http://www.revistasice.com/cmsrevistasICE/pdfs/BICE_2740_19-29__8A787D3F005521DDB8F16C9B13404D60.pdf.51 See the ASIF/APPA report “The role of photovoltaic energy in Spain”, November, 2007. This is aconservative figure for turnkey projects because, for those installing two-axis solar tracking structure,prices revolve around 6.3 M€/MW and around 5.2 €/MW for fixed structure.52 Average cost calculated from the annual average operation of mini-hydroelectric Spanish plants in thepast 8 years (2,556 hours) and considering that Spain, towards 31 December 2008 had 1,949 installedMW in 936 different locations. These figures bring about an average size per plant of 2.06MW, with anaverage installation cost between 1.45 M€/MW and 1.97 M€/MW, i.e., 1.71 M€/MW (average). This isthe value that will be applied to the 624 installed MW from 2000 to 2008. See “Checklist para inversióny estudios de viabilidad en Mini hidráulica“, report published by the European Commission.53 According to Instituto Sindical de Trabajo, Ambiente y Salud (ISTAS), the distribution of those greenjobs is the following: 9.58% are jobs in maintenance and operation, 24% are jobs in administration,marketing and projects and 66.27% in construction, fabrication and installation. At this point has to bestated that it is a usual practice to include the complete productive chain of renewable production ofelectricity and compare the figures with the jobs created by the energy sector just at the energycompanies. For this, see, for example, Asociación Empresarial Eólica, Estudio Macroeconómico delSector Eólico en España, p. 33, footnote 7. -25-Study of the effects on employment of public aid to renewableenergy sources

TOTAL 11491 19122 5020054 28671.14 0.571138247 31921.54 0.65887251

Source: Own elaboration based on the previous data (2000-2008).

54 Included here are the 11,000 jobs lost due to support effects and the 5,000 jobs lost due toconventional displacement, in order to calculate the total number of jobs created. Once again, we areassigning the totality of these jobs only to the three renewable technologies and not proportionally tothe jobs created to all of the renewable technologies and biofuels and thus we are counting a highernumber of jobs that correspond to these technologies. The director of this study attempted torepeatedly contact the MITRE authors to separate the various categories, but there was no response. -26-CHAPTER 4. THE ECONOMICS OF ARTIFICIAL JOB CREATION: A CALCULATION OF THE

COST OF GREEN JOBS ON THE REST

OF PRODUCTIVE ACTIVITY

Public investment in renewable energy has job creation as one of its explicit goals,which, given the current economic crisis, suggests an intention of seeding a futurerecovery with “green job” subsidies. The problem with this plan is that the resourcesused to create “green jobs” must be obtained from elsewhere in the economy.Therefore, this type of policy tends to create not just a crowding-out effect but also anet destruction of capital insofar as the investment necessary must be subsidized to agreat extent and this is carried out by absorbing or destroying capital from the rest ofthe economy.

The money spent by the government cannot, once committed to “green jobs”, beconsumed or invested by private parties and therefore the jobs that would depend onsuch consumption and investment will disappear or not be created.

Investment in green jobs will only prove convenient if the expense by the public sectoris more efficient at generating wealth than the private sector. This would only bepossible if public investment were able to be self-financing without having to resort tosubsidies, i.e., without needing to absorb wealth generated by the rest of the economyin order to support a production that cannot be justified through the incurred incomesand costs. We have calculated that the total public subsidy in Spain, both spent andcommitted, totals 28,671 million Euros (€28.7 billion or appx. $37 billion USD), andsustains 50,200 jobs.

In order to know how many net jobs are destroyed by a green job program for eachone that it is intended to create, we use two different methods: with the first, wecompare the average amount of capital destruction (the subsidized part of theinvestment) necessary to create a green job against the average amount of capital thata job requires in the private sector; with the second, we compare the average annualproductivity that the subsidy to each green job would have contributed to theeconomy had it not been consumed in such a way, with the average productivity oflabor in the private sector that allows workers to remain employed.

-27-Study of the effects on employment of public aid to renewableenergy sources

II.. Stock of capital per worker

The total amount of invested and promised money to guarantee the viability ofrenewable energy in Spain is as high as 28,671 million Euros, and, if we include the non-subsidized investment, up to 50,200 employees have been put to work.

This forcible loss of resources incurred by renewable energy programs must be

compared with the average resources per worker allocated in the private sector. Theparameter that most closely approximates it is the average stock of capital per worker,whose mean between 1995 and 2005 in Spain was 259,143 Euros.

Therefore, for every green job that is attempted to be created, there is a 2.2destruction of the resources that on average the private sector employs per worker

Subdidy _ to _ renewables _ per _ wor ker 571,138

= = 2 .2 Average _ capital _ per _ wor ker 259,143

This is to say that for every renewable energy job that the State manages to finance,we can be confident that on average 2.2 jobs will be destroyed, to which we have toadd those jobs that the non-subsidized investment would have created.

IIII.. The annual productivity of the expense

In this section, we shall compare the average annual productivity that the green jobsubsidy would have contributed to the economy had it not been consumed in publicfinancing, with the average productivity in the private sector that allows them to keeptheir job, the latter being ultimately the measure which justifies the creation orpreservation of that job.

In order to obtain the annual public consumption of resources devoted to renewable

energy we calculate the average annuity value during the next 25 years of subsidies.Now, what should be the rate at which we discount the annuities? In a privateenterprise, the adequate rate would be the ROA (return on assets) because this is therate of additional return that we would have obtained over a year if we had allocated,in the private sector, the annual cost of renewables.

For an entire economy, the closest thing we have to an ROA is the relationshipbetween the annual income of capital and the stock of capital in the economy, that is, aratio of the annual return on that stock of capital.

In Spain, annual capital profitability has slowed in recent years and thus we will take thelowest rate available: 8.53% in 2005.55 With this discount, the average annuity for theend of 2008 is €55,946 per worker.

55 Own elaboration from National Accounting figures published by National Statistics Institute (INE) andthe BBVA Research Foundation. -28- The economics of artificial job creation: a calculation of the cost of green jobs on the rest of productive activity

This figure must be compared with the annual average productivity per worker in therest of the economy. We can obtain this data by dividing the total income of labor inthe economy by the number of workers. Thus, the average productivity per worker,between 2003 and 2007, was 25,332 Euros56.

Thus, on average, the subsidized green job destroys the resources required to havecreated 2.2 jobs in the economy.

Annual _ subsidy _ to _ renewables _ per _ wor ker 55,946

= = 2 .2 Average _ productivity _ per _ wor ker 25,332

Consequently, through the use of both methods we have reached a similar conclusion:for every green job, we can be highly confident that 2.2 jobs are destroyed elsewherein the economy, to which we have to add those jobs that the non-subsidizedinvestment would have created.

With that said, not all forms of energy sources are equally destructive, given that, toremain competitive, not all of them require the same amount of subsidy per megawatt.Our calculations, charted, reveal the following:

Figure 9.- Subsidy per MW (in €)

Source: Own elaboration.

We see that solar energy is significantly less competitive given that it requires morethan twice the amount production of subsidy per megawatt compared to wind energy.By putting the per megawatt subsidy data in relation to the mean amount of capitalresources, we obtain the number of jobs lost as a result of each kind of subsidizedrenewable energy source.

56 Cuentas Nacionales, INE. -29-Study of the effects on employment of public aid to renewableenergy sources

We achieve an identical result by relating the present value of an annuity of the sum ofthe committed amount with the annual productivity of labor:

Figure 10.- Employment destroyed per installed megawatt

Source: Own elaboration.

As we can see in figure 10, each renewable megawatt installed, on average (givenSpain’s breakdown of individual source contributions), destroys 5.28 jobs, comparedwith the 4.27 jobs destroyed per megawatt of wind energy, the 5.05 jobs destroyedper megawatt of mini-hydro and the 8.99 destroyed per megawatt of photovoltaicinstalled capacity as a result of “green jobs” mandates, subsidies and related regimes.

This result is important, since although solar energy may on paper appear to employmany workers (essentially in the plant’s construction), the reality is that for the plantto work, it requires consumption of great amounts of capital that would have insteadcreated many more jobs in other parts of the economy. Inversely, wind power, whilestill noxious in its economic impact when coercively introduced through stateintervention, wastes far fewer resources per megawatt of installed capacity and thusdoes not destroy as many jobs in the rest of the economy.

This case is similar to the one that French economist Frédéric Bastiat denounced in hisfamous “Petition by the candle-makers,” in which he ridicules the intentions ofprotectionist entrepreneurs by comparing them to candle-makers clamoring for thestate to crowd-out the sun, which was competing with them unfairly when providinglight. In their opinion, if the sun was barred from providing light, numerous jobs wouldbe created in the candle manufacturing industry. Obviously, this is not so: precisely bynot being able to profit from the sun’s light we would be wasting scarce resources inthe production of candles instead of producing other goods and services that wouldincrease our wealth.

Finally, it is worth considering the distribution of the destroyed jobs across theeconomy. Obviously, the specific productive sectors affected will depend on how thegovernment finances the subsidies to renewable energy. We can basically separate the

-30- The economics of artificial job creation: a calculation of the cost of green jobs on the rest of productive activity

approaches intro three groups: increases in energy rates, increase in taxes or an

increase in public debt.

The first method aims to correct the rate deficit, which in part is caused by thesubsidies to the renewables, evidenced by a higher future electric cost. According tothe National Energy Commission, the price of a comprehensive energy rate (paid bythe end consumer) in Spain would have to be increased 31% to begin to repay thehistoric debt generated by this deficit.57

It is obvious that, if the rates were to increase by 31% — or by a lower percentage

which, while it would not eliminate the deficit, it would reduce it—the energy intensivecompanies would suffer a very pronounced decline in their profitability and would haveto reduce or eliminate operations in Spain. In our country, the sectors that consumethe most energy are metallurgy, non-metallic mining and food processing, beverage andtobacco.

From the groups above, it is worth highlighting that some of the most affectedindustries58 would be producers of basic iron and steel products (in Spain, it consumed€470.77 million), basic chemical products (€382.13 million), plastics (€297.18 million),manufacture and first transformation of precious metals (€280.58 million) as well asproducers of cement, lime and plaster (€202.22 million).

57 See “Tarifas de acceso para 2009 y revisión de las tarifas integrales vigentes para el primer trimestrede 2009”, CNE, November 7th 2008: http://www.cne.es/cne/doc/publicaciones/cne141_08.pdf58 Source: the most electricity-intensive industries pointed out here are taken from INE’s Energyconsumption survey (2007), table “Energy consumption by activity sectors and product consumed”. -31-Study of the effects on employment of public aid to renewableenergy sources

Unsurprisingly, the steel mills, the most electricity-intensive sector, have already beenhurt by the high prices of electricity in Spain, exactly as the Acerinox examplediscussed below.

It is possible, of course, as it is indeed the case today in Spain, that the administrationmay try to prevent the most energy-intensive companies from leaving by bestowingupon them the privilege of paying a lower rate than the rest of the consumers pay. InSpain, it happens with the G4 rate, which is being taken advantage of by companiessuch as Arcelor Mittal, Asturiana de Zinc and Alcoa. But, as we have said, this privilegeexacerbates the rate deficit, which, ultimately, must be financed through higher pricesfor the rest of non-privileged consumers or for the taxpayer.

And this leads us to the second possibility that we will mention to finance the ratedeficit: an increase in taxation.

This method reduces the amount of income that consumers or businesses haveavailable, reducing consumption and/or investment. For example, the average annuitypayable to renewables is equivalent to 4.35% of all VAT collected, 3.45% of thehousehold income tax, or 5.6% of the corporate income tax for 2007.59 Regardless ofwhether the increase impacts consumption or investment more, the most affectedsectors of the economy will be those with a greater pro-cyclical productions (such asautomotive).

Finally, the subsidy to pay for “green jobs” or renewables could be financed by issuingpublic debt. This strategy poses a similar effect to the previous method but spread outover time (since it implies higher future taxes). However, debt has an additional effect:a restriction of present available credit that a business could use to refinance its debtor undertake new investments. Thus, employees of the most leveraged businesses orof investment projects that would need cheaper credit to be undertaken will suffer thecosts of the renewables.

It is not possible to directly translate Spain’s experience with similar exactitude or

confidence, and claim that the U.S. should expect a loss of from 6.6 million to elevenmillion jobs as a direct consequence were the promise to create 3 to 5 million “greenjobs” met (in addition to the jobs lost due to the opportunity cost of private capitalemployed in renewable energy), although the study clearly reveals that if PresidentObama would dedicate the massive resources needed to create those 3 to 5 millionjobs, the U.S. should certainly expect its results to follow such a tendency.

At minimum, therefore, the study exposing the Spanish experience that PresidentObama cites as a model for the U.S. to replicate in quickly implementing “green jobs”programs serves as a note of caution that the reality far from what has typically beenpresented, and that such schemes offer considerable employment consequences andimplications for emerging from the economic crisis.

59 Own elaboration from Eurostat figures. -32- The economics of artificial job creation: a calculation of the cost of green jobs on the rest of productive activity

IIIIII.. Spain’s Self-inflicted Economic Wounds from

“Green Jobs” Regimes

The late 90s already witnessed an energy leakage in Spain. As Jesús Lizcano Álvarez60put it, “Other substantial costs that can determine in some industries whether arelocation decision takes place can be energy costs, which –since they are higher inSpain than elsewhere nearby– along with other factor, have been crucial in cases suchas the one of the Chemical company Hoeschst Ibérica, in its redirection of part of itsinvestments abroad, or the case of Marcial Uchin, when deciding to build a steel mill inFrance, where energy costs are clearly competitive compared to Spain’s.”61 Companiessuch as Sidenor have followed a similar path moving electric ovens to, e.g., France andother countries outside the EU, where energy prices are more competitive in theglobal market.

In April of 2004, the Mining-Metalurgy Federation of de CC.OO. strongly denounced

the decision by the Grupo Celsa (parent company of Trefilerías Quijano, Global SteelWire, Tycsa PSC, Tycsa Servicios, Laminaciones Arregui, Nervacero, TrefileríasMoreda, Celsa y Riviere) to close Trefilerías Quijano which, according to this unionorganization, was obeying a relocation policy as part of a plan to purchase a factory inPoland. However, the same union organization acknowledged the true culprit of theserelocations when, in 2008, they warned that “we must take into account the profoundimpact that” an increase in energy costs “would have on the overall economy, andspecifically, on industry and employment and families.” The union perhaps would haveobtained better results had they protested the European energy policy responsible forthe loss of competitiveness in this sector, which has been zealously put into practice bythe Spanish government.

Towards the end of 2006, UNESID (Unión de Empresas Siderúrgicas) warned that theprocess of liberalizing the electric market would lead to a relocation of a good portionof this industry due to the loss of competitiveness caused by high energy costs in Spaindue to an energy policy closely linked to the promotion of renewable energy.

That same year, Ferroatlántica sounded the alarm. The company, the only producer ofiron alloys in Spain, had an electric consumption of 2,300 Ghw in 2006 on Spanish soiland is the economic engine of the region of A Costa da Morte (Galicia). The continualincrease in the cost of energy studied in this paper caused a change in the percentageof energy as a total cost of production in ferrosilicium from 37.1% in 1997 to 38.6% in2000 and 43.2% in 2005. After years of installing efficient energy managementmeasures, and increasing its productivity, in 2006 Ferroatlántica’s factories had reachedtheir productive capacity.

Because of that reality, the increases in energy prices had caused Ferroatlántica to losecompetitiveness. The closing of the plants and their relocation to other countries such

as France, where they already had a presence, is –according to the company-

unstoppable.

The company stated that the challenge is clear: “only internationally competitiveenergy prices will allow us to support such a basic industry, not only because it belongsto a strategic sector, but also to support employment and generate wealth.”

Gonzalo Urquijo, president of UNESID, has repeatedly shown his and the industry’sconcern about energy prices in Spain. In 2007, he denounced, before the Minister ofIndustry, that the electric rates had gone up 30% in two years, not to mention anincrease of 85% in the price of natural gas. Urquijo remarked that “though the increasein prices has been absorbed in the last two years due to the strength of the demand,when consumption lowers this sector will find that the increase in prices has becomepermanent causing an unfavorable impact on its competitiveness.” This is preciselywhat is happening in Spain, presently, where the metallurgy industry is facing its biggestloss in demand in its history.

such as metallurgy, cement, chemicals, ceramics and gas, and operating more than 100factories, formed in September of 2007 an association to attempt to lower theelevated price they pay for electricity and thus be able to compete with companies inother countries where the electric cost is not as cumbersome. These companiescomprise 18% of the industrial electric consumption in Spain and 7% of the totaldemand in the Iberian Peninsula.

The goal of this union is twofold. On the one hand, it is to act as a central energypurchaser and, on the other, to attempt to receive from the administration specialtreatment allowing them to be exempted from paying the invoice incurred by thecurrent energy policy. If they fail at this, shutting down and fleeing abroad will beunavoidable. The president of Asturiana de Zinc (one of Fortia´s members), SantiagoZaldumbide, has openly declared that his company will relocate if no alternative isfound to paying such a high market price of electricity in Spain. In terms of labor costs,what is at risk if these 18 companies relocate are the 47,000 jobs that they create.

Before liberalizing the purchase of electricity by large consumers in July of 2008, thehigh-voltage regulated electric rate had been continually increasing, pushed by theburgeoning costs of electricity generation. Thus, between 1998 and 2008, the high-voltage rate increased by 40%. Last year, due to the change in rate, the large electricityconsumers saw their electric price go up near 55%.

Further, the AEGE (Asociación de Empresas con Gran Consumo de Energía) has forsome time warned about the same risks caused by Spain’s energy policy. Its vicepresident, Javier Penacho, pointed out in May of 2008 that in a system such as thecurrent one, “the reference price of energy is determined by the worst technologyavailable on the market” and that this would “have grave consequences in matters ofcompetitiveness, relocations and de-investments.”

But perhaps the most telling example of the effects that we are studying, given its size,situation as a global enterprise, its Spanish origin and flexibility in managing its plants in

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3 continents (and 4 soon), is that of the world’s second-largest manufacturer of

stainless steel, Acerinox.

Acerinox has already reduced or avoided extending its presence in Spain due to thehigh energy costs. Victoriano Muñoz, who led that company for 37 years, warned ofthe dangers of an electricity market distorted by such interventions in Spain as it wouldimpose higher energy costs for industry. In April of 2002 he explained that the price ofelectricity for consumers had increased by 10.6% since the beginning of the decade,not to mention the related dozens of interruptions in the provision of that service.

A year later, the president of this leading stainless steel producer explained that inspite of good management and profits, important doubts had been cast about thecompany’s operations as a result of the Kyoto agenda – a key part of which is a similar“green jobs” push – leading to possible relocation due to higher energy costs tonations that do not impose such regimes.

Consequently, when in 2004 Acerinox decided to increase the size and capacity of itsoperations it did so at plants in Kentucky (USA) and Columbia (South Africa), decidingto freeze its expansion plans in Spain, it cited the energy cost factor as influential.Consequently, green energy was to blame for the export of growth, meaning thetransfer of hundreds of jobs from Spain to the USA and to South Africa.

In his last press appearance as CEO of Acerinox in July of 2008, Muñoz expressedregret and concern over the loss of competitiveness in the Spanish industry, which heblamed primarily on the continuous increase in energy prices. “We are going to havethe highest prices in Europe,” he said during his farewell, in which he once again urgedremoval of the barriers to construct nuclear plants as a way to achieve the Kyotoobjectives, instead of the emphasis on renewable energy regimes that increase theprice of electricity but not its reliability.

That final meeting with the press took place after Muñoz’s last general shareholdermeeting as president of Acerinox. In his remarks, he spoke of the loss ofcompetitiveness in the Spanish industry due to a new 9.2% rise in actual cost per Kwhin 2006, the latest of many previous increases. However, this businessman, famous forhis entrepreneurial spirit, commented that “we are afraid that the worst is yet tocome,” because, beyond the changes in regulated rates, “the continuous reduction ofthe hydroelectric and nuclear energy production share of the total Spanish electricalsystem.”

Victoriano Muñoz associated Spain’s ever-higher energy prices with the “green energy”policies enacted as a result of the Kyoto Protocol, even more than the “cap-and-trade”policy also adopted under Kyoto. Indeed, he explained that, although cap-and-tradehad not yet directly harmed their bottom line, “indirectly, it affects [operations] verynegatively through higher energy cost,”62 That is, cap-and-trade’s impact was first felt in

62 Mr. Muñoz statements at Acerinox's annual reports and speeches at the General ShareholderMeetings (2002-2007) are downloadable at www.acerinox.es. His last press conference, that can befound at the following link: http://www.eleconomista.es/empresas- -35-Study of the effects on employment of public aid to renewableenergy sources

the form of programs escalated in anticipation of the regime’s implementation, in that